By Naomi Rovnick and Tom Westbrook. Media: Reuters
LONDON/SINGAPORE, Feb 18 (Reuters) – European shares hit record highs on Tuesday and Wall Street stock futures advanced as traders gambled on a big European defence spending hike, while strong U.S. earnings overshadowed fears of trade tariffs deterring Federal Reserve rate cuts.
The pan-European STOXX 600 index (.STOXX), opens new tab hit an all-time high of 556.81 early on Tuesday before easing to 556.1 as a gauge of defence and aerospace stocks (.SXPARO), opens new tab rose 1.3% after rallying more than 4% on Monday.
A Chinese stock rally cheering Monday’s rare meeting between President Xi Jinping and domestic business leaders also boosted risk-taking appetite, helping lift futures contracts tracking Wall Street’s S&P 500 and Nasdaq 100 about 0.3% higher.
As European leaders vowed to step up support for Ukraine if bilateral talks this week between Russia and the U.S. lead to a hasty peace deal that compromised Europe’s security, investors also hope this weekend’s German election will lead to economic stimulus.
“That means massive fiscal transformation in Europe,” said John Hardy, global head of macro strategy at Saxo Bank in Denmark. He expected Europe’s STOXX index to outperform Wall Street this year, meanwhile, as investors also fretted about U.S. trade tariffs, inflation and highly valued tech stocks.
Europe’s stock indices are dominated by industrial groups, energy producers and banks and attracted their biggest weekly investment inflow last week since January 2023, Bank of America said.
“The idea is very simple: overvalued U.S. tech (and) attractive value in Europe,” Lombard Odier Investment Managers multi-asset portfolio manager Florian Ielpo said.
“That old (economy) world now looks very attractive.”
Key measures of U.S. inflation are also running at a half percentage point or more above the Fed’s goal, with some of its officials arguing to delay rate cuts.
Minutes from the Fed’s January meeting, where it held borrowing costs at 4.25% to 4.5%, are due on Wednesday. That follows hawkish comments from central bank chair Jerome Powell in testimony to Congress last week and hot consumer prices data.
U.S. retail sales last Friday, however, were weaker than economists polled by Reuters had expected.
GOLD SPARKLES
Geopolitical anxiety drove the spot gold price 0.6% higher to $2,914 an ounce on Tuesday , but failed to spark haven buying of government bonds weighed down by spending and inflation concerns as oil prices also softened.
Expectations for higher government spending lifted Germany’s benchmark 10-year bond yield to 2.5%, near its highest level of the month.
The 10-year U.S. Treasury yield added 4 basis points (bps) to 4.53% and Britain’s equivalent gilt yield rose 3 bps to 4.56%.
Brent crude oil was steady at $75.26 a barrel as traders awaited the outcome of the Russia-U.S. talks taking place in Riyadh and speculated about potential supply increases if Washington agrees to abandon sanctions on Russian oil.
Elsewhere in markets, the euro was 0.3% lower against the dollar at $1.045 as tariff fears and geopolitical concerns lifted the U.S. currency’s haven appeal.
Sterling also edged 0.3% lower to $1.259 and Japan’s yen lost 0.2% against the dollar despite growth data having bolstered prospects for Bank of Japan rate hikes.
Australia’s dollar was 0.2% lower at 0.63%, having been spared blows from the central bank’s first rate cut since 2020 on Tuesday as policymakers delivered it with caution about prospects of further easing.
In Asian stocks, Hong Kong’s Hang Seng Index (.HSI), opens new tab jumped 1.6% to its highest since early October as Chinese tech groups rallied. Japan’s Nikkei rose 0.5% with bank and defence-related shares taking their cues from Europe’s rally.
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